Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Tuesday, April 19, 2011

NASAA Requests Comments on Revisions to Proposed Custody Rule

The North American Securities Administrators Association (NASAA) has re-released for member and public comment the organization's proposed changes to NASAA's model rule on investment adviser custody (Proposed Rule). The proposal, if adopted, would modify both Model Rule 102(e)(1)-1 under the Uniform Securities Act of 1956 and Model Rule USA 2002 411(f)-(1) under the Uniform Securities Act of 2002.

On February 17, 2011, NASAA's Investment Adviser Regulatory Policy and Review Project Group (Project Group) had proposed amendments to NASAA's model rules pertaining to investment adviser custody, financial requirements, recordkeeping and brochure delivery. These changes are required in order to address changes by the U.S. Securities and Exchange Commission (SEC) to its custody and brochure rules for investment advisers. With regard to the proposed amendments to NASAA's model on investment adviser custody, the Project Group had especially asked for comments on the advantages and disadvantages of requiring advisers to private funds to provide quarterly statements to investors.

The Project Group noted that several comments submitted by individuals or entities representing various private funds objected to the quarterly statement requirement, contending, among other things, that the disclosure of detailed trading information would be contrary to how private funds are designed to operate. The commenters had pointed out that an investor in a pooled vehicle who is provided with detailed trading information could, in turn, use that information to trade independently of the fund to the detriment of other investors in that fund. The commenters were also concerned that this requirement could lead to the misappropriation of the trading strategies engaged in by a private fund. The Project Group observed that supporters of the provision, however, believe strongly that regulators and investors should have access to detailed information on the investment activities of the fund in order to understand how the fund is being managed and to identify potential problem areas with the fund and fund adviser.

The Project Group is proposing, therefore, a revision to Section (b)(4)(A) of the Proposed Rule. The proposed revision would maintain the requirement for advisers to private funds to send quarterly statements to investors. These statements must disclose the opening and closing cash balances and the closing security positions of the fund as a whole for the quarterly statement period. In addition, the total amount of additions and withdrawals from the fund as a whole and for each investor must also be disclosed.

Instead of a requirement to list all transactions during the quarter with specificity, the Project Group is proposing that an aggregate listing of transactions be included, with a breakdown by category rather than individual trade. The Project Group believes the absence of trade dates, specific securities and execution prices would address industry concern over identification of trading strategies while providing regulators and investors important information about the activities of the fund.

The comment period will remain open for 30 days. Accordingly, all comments should be submitted on or before May 19, 2011. Comments should be submitted by email or in writing and addressed to Kenneth Hojnacki, Director of Professional Registration and Compliance, Wisconsin DFI Division of Securities, at the address provided. Copies of all comments should also be sent to each of the contacts listed in the notice.